Caterpillar: Health overhaul will hit earnings

Caterpillar Inc. will feel an immediate impact - to the tune of $100 million - from the health care reform legislation, the company said Wednesday in a regulatory filing.

Paul Gordon

Caterpillar Inc. will feel an immediate impact - to the tune of $100 million - from the health care reform legislation, the company said Wednesday in a regulatory filing.

Caterpillar said its first-quarter earnings will be reduced by that amount because that legislation, signed into law by President Obama on Tuesday, will cause it to lose the Medicare Part D Retiree Drug Subsidy available to companies that provide their retirees with prescription drug plans.

The company told the U.S. Securities and Exchange Commission about the charge because it will affect the company's bottom line in the first quarter, which ends March 31. The last official communication the company had with the SEC about finances included its 2010 outlook, in which the company said it expects a full-year profit of about $2.50 a share. It did not include the potential effect of the Medicare tax.

In the document filed with the SEC on Wednesday, Caterpillar said that even though the Medicare Part D tax deduction doesn't take effect until 2011, "Caterpillar is required to recognize the full accounting impact in its financial statements in the period in which the (Patient Protection and Affordable Care) Act is signed."

"As retiree health care liabilities and related tax impacts are already reflected in Caterpillar's financial statements, the change will result in a charge to Caterpillar's earnings in the first quarter of 2010 of approximately $100 million after tax. This charge reflects the anticipated increase in taxes that will occur as a result of the act," the company said.

The $100 million is the company's estimate of how the Medicare tax will affect it for the full year, but the entire charge must be taken in the first quarter, the company said.

Caterpillar is scheduled to report its first-quarter earnings on April 26.

In a letter to employees sent out later Wednesday, Greg Folley, the company's vice president of human resources, explained the filing.

"The timing of this tax increase could not be worse. As you know, last year we faced the worst global economic conditions since the Great Depression. Now, as we are beginning to see some signs of recovery and pockets of increased demand, we are faced with this additional cost, which will not have the same impact on many of our global competitors," Folley said.

"The full extent of this tax increase - and other possible cost increases related to the law and the mandates included in it - is not yet clear. However, the new law will increase Caterpillar's cost of providing health care benefits, which is likely to have an impact on Caterpillar employees and retirees. As we move forward, we must balance our ability to remain competitive in the global marketplace with the burdens presented by new taxes and other regulations. We will keep you informed as we develop our strategies to manage these costs and health care system changes."

The law not only will "negatively affect Caterpillar's profitability in 2010," Folley said the part of the law that removes the retiree drug subsidy "substantially lessens that program and may cause companies like Caterpillar to consider changes to its retiree prescription drug benefit plans."

Caterpillar spokesman Jim Dugan said the company has not made any decisions regarding the retiree prescription drug benefits or any other medical benefits, even though Caterpillar expects more effects from the bill than just the elimination of the drug subsidy.

Dugan said the legislation itself isn't likely to affect employment or the call back of laid off workers as those are tied primarily to demand.

However, he cited Folley's letter about the company's foreign competitors not having the same health care issues. "This could affect our ability to compete globally" with competitors that don't have the same issues, he said.

Paul Gordon can be reached at pgordon@pjstar.com.

Never miss a story

Choose the plan that's right for you.
Digital access or digital and print delivery.